Wednesday, June 3, 2009

Now that many houses for sale can be viewed on the internet, it is entirely possible to conduct a search for a house without the assistance of a real estate broker. But a peculiarity of the real estate market is that a buyer who does not use a broker may not reduce the fees paid in the transaction. A typical seller's contract with the broker who helps put the house on the market (the "originating broker") is for 6% of the selling price. If the buyer is accompanied by an agent, this fee is split between the two. If the buyer comes without an agent, the 6% is paid entirely to the originating broker.

An internet brokerage firm has seen this as an opportunity. Redfin.com offers to represent buyers and refund 50% of Redfin's half of the fee set by the originating broker and seller. So, if the fee is the conventional 6% of the sales price, Redfin as the buyer's broker would get 3% and refund 1.5%. That is, if you are on the verge of buying a house for a million dollars without a broker, but instead close the deal through Redfin, they will give you $15,000. That's not a bad reason to have an agent.

Obviously this is inefficient from the point of view of the buyer, seller, and originating broker (since if they could negotiate efficiently they could divide among themselves the 15K that Redfin keeps). But the final moments of the negotiations are tense ones, in which the reservation values of all three parties are unknown, so this may not be the kind of 3-way negotiations in which we should expect efficiency. So Redfin may have a good business.

I keep expecting the real estate market to undergo some fundamental change, and maybe this is a sign of pressure building.

HT: Michael Schwarz

p.s. for completeness, I note that Redfin also offers discounted sell-side services, part of which come with a fee that is not contingent on whether or not a sale results.